Last month, we talked about the importance of having a solid accounting foundation (ideally) from the inception of your small business. Along with this, as a business owner, it is vital to have an understanding of “accounting basics” as you work with your professional accountant to ensure the financial health of your organization.

Accounting 101 

Some basic accounting functions are helpful to know and understand as you begin your business journey. Even if you already have an accountant, it is beneficial to learn the basics. 

Put simply, accounting is the process of how a business monitors money coming in and out. Having clear, organized accounting records is essential for both the business owner and any stakeholders needing access to your financial information.

The goal here is to provide you with the fundamentals for your accounting needs so you can be empowered to make the right decisions moving forward.

Here is a compiled list of some general accounting knowledge to get you started.

Key Terms

  1. General accounting: General ledger collection for the quarter, calendar, or fiscal year.
  2. Financial accounting: The summary, analysis, and reporting used to project business expenses and investments accordingly. 
  3. Assets: Everything that your company owns–both tangible and intangible. Examples of tangible assets include equipment, property, land, tools, or cash. Intangible assets would be things such as copyrights, patents, or trademarks. 
  4. Liabilities: Debts that a business is responsible for paying in the short or long term (e.g., mortgages, credit card balances). 
  5. Forecasting: The process of using your business’ past historical data to predict future trends. This is important for estimating appropriate budgets and predicting sales, gross profits, or how long it may take to pay off long-term debt. 
  6. Accounts payable: Any outstanding bills you owe vendors for goods and services are considered part of your accounts payable. These liabilities must be weighed against your business assets and income to project cash flow accurately.
  7. Accounts receivable: The money owed to your business by its customers or clients. These accounts are typically tracked via invoices, which specify payment terms (e.g., within a specific number of days after receipt) so you will know when to expect incoming cash.
  8. Generally Accepted Accounting Principles (GAAP): GAAP is a set of standard rules that most American companies are expected to follow in their accounting practices. These principles provide guidelines for tracking, measuring, and reporting on your company’s finances for outside parties—a combination of traditional standards and accepted techniques. 
  9. Cash basis accounting method: One of the two most common accounting methods, cash basis accounting means you record income and expenses as they are received and paid. This is often preferred by small businesses because of its simplicity, even though it may give a misleading picture of your cash flow (e.g., if you receive payment for a bill the month after you issued it).
  10. Accrual-basis accounting method: Businesses that earn more than $25 million in revenue must follow accrual basis accounting. Instead of recording income when received, you must log it when you bill it, which means you may be paying taxes on money you haven’t received yet. However, it does provide a more accurate long-term view of your finances than cash basis accounting.


There are financial reports that every business must understand how to prepare as part of their accounting processes. These statements are designed to document your business’s income and expenses for external stakeholders like investors, lenders, and creditors.


  • A profit and loss (P&L) statement, or your “income statement,” is most commonly requested by accountants and tax preparers when it comes time to file your business taxes with the IRS, but you may also need to share it with lenders if you apply for funding. The P&L statement gives an overview of your business’s profitability by listing your earnings, expenses, and net profits for a given period.
  • A balance sheet is an overview of your business’s financial standing at a given point in time. This will list your company’s assets, liabilities, and equity–all of which can help understand how much your business is worth.
  • A cash flow statement helps you monitor your company’s financial activity by tracking and categorizing each cash inflow and outflow. Nearly every item on your cash flow statement will be classified in one of three categories: operations, investment, or financing.
  • A stockholders’ equity statement will be needed if your business has shareholders or investors with equity in the company. This statement is part of your balance sheet and is influenced by share capital, retained earnings, and net income and dividends. 

Getting Help

A commonly asked question about accounting is whether a small business actually needs to hire an accountant.

The answer is, “yes.” As a business grows, finances usually become more intricate. At this point, it would serve you well to hire an accounting firm or independent CPA to help you manage your books. This will become especially important when you hire full-time or part-time W-2 employees, as the tax payment and reporting requirements for these workers are more involved than 1099 contractors.

Outsourcing your core accounting tasks can ensure that all requirements are met and completed with accuracy, which can free up your valuable time that you would rather put into your business.

When searching for the right accounting firm, consider the following:

  • Certifications
  • Relevant experience
  • Money-saving strategies and expertise
  • Knowledge of your preferred software

What an Accountant Can Do for You 

Start-Up Phase

Beginning a business is a very involved process, one in which there are several tasks to be accomplished, systems to be set in place, and essentially–many hats to be worn. 

During the start-up process, most owners aim to keep the business team small, but here are some reasons why an accountant may be an excellent addition to your start-up team. 

An accountant can assist by:

  • Working with you to decide the best business structure (e.g., partnership, LLC, corporation, sole proprietorship). 
  • Helping with your business plan financial analysis.
  • Assessing the type of accounting software that may fit your needs best.
  • Guiding you through the process of opening business bank accounts.
  • Ensuring accounting practices comply with government regulations and requirements.
  • Providing advice on tracking expenses for daily business activities.
  • Teaching you the importance of separating business and personal expenses. 

Business Operations

It is critical that you maintain the accounting system your accountant helped you set up, especially once your business is off the ground. Beyond this, your accountant will continue to provide you with invaluable assistance on an ongoing basis. 

Some examples of this include:

  • Ensuring that your independent contractors are classified as such (and not employees) by the IRS. 
  • Explaining your financial statements so you can develop an understanding of how your business is functioning. 
  • Supervising company payroll and payment processes.
  • Providing guidance on estimated tax payments you should make during the year.
  • Determining to whom and when you should send W2 and 1099 tax forms.
  • Handling end of the year financial reports as well as closing out your books.
  • Compiling and submitting your taxes, financial reports, and all necessary paperwork to the IRS.

Business Growth

When you reach the point where you would like to consider growing your business, your accountant is a crucial resource for this process. They will help you understanding timing, provide advice, and assist you in managing the process. 

An accountant can also:

  • Assist in determining growth areas by providing insight into cash flow patterns, inventory management, business financing, and pricing.
  • Assist in preventing an IRS audit and guiding you through the process if it does occur. 
  • Create financial forecasts to empower you to make better business decisions.
  • Help you create and maintain a budget for your business to achieve your goals. 
  • Answer questions on property and equipment purchase and leasing. 
  • Assist you with the sale of your business.

By no means is this all your accountant can do for you. But, as you can see, accountants can work with small business owners in every phase of their business. While it is recommended that you begin with an accountant from the start, it is hugely important to be able to recognize when it is time to ask for the help of a professional. 

These tips are intended to help you understand what accounting is and does for your business, and hopefully, help you find the right accountant for your business’s fiscal health.